German insurers invest €5bn in hedge funds despite scandal

GERMANY- German insurers have invested about €5bn, or more than four times previous estimates, in hedge funds in 2004, according to its trade body (GDV), and are now more worried about poor performance than the latest hedge fund scandal.

Ulrich Krueger, head of the investment department at the Berlin-based GDV, told IPE that insurance companies had invested about €5bn, or 0.5% of its €1,000bn of assets, in hedge funds.

Consultant Christian Edelmann of Mercer Oliver Wyman said its February report, ‘The End of the Warm-Up Phase: Is the German Hedge Fund Market Getting Ready?’, included the previous estimates from the GDV that insurers had invested only €1.2bn in the alternatives, while pension funds had invested €2.4bn.

But Krueger said institutions now were more likely to worry about poor hedge funds returns than the being scared off by the scandal-hit Phoenix, which has reportedly lost at least €600m.

“I do not think it the Phoenix_scandal will have any impact on insurance companies and pensionskassen,” he told IPE. He said this was because the financial services regulator (BaFin) had already set high standards for hedge fund investment and investors already thought hedge funds had a “bad reputation,” the GDV expert said, which meant only the more sophisticated institutions with a higher risk tolerance would have committed money to them so soon.

Last week the German financial services regulator (BaFin) instructed Phoenix to stop trading, which effectively blocked its activities, while the police and regional judiciary investigated its accounts on allegations that it had lost at least €600m.

But Krueger said it would take “many long years” before the majority of pension funds and insurance company actually invest up to 5% in hedge funds, which, after last year’s rule change, was the maximum they could allocate.

An analyst said hedge fund investment would take off further if there was a change in the tax regime. However, for investors already committed to the alternatives, the Phoenix scandal would have little impact because they “are generally also prepared to take high risks,” he said.

But hedge fund practitioners thought Phoenix’s suspension could have a negative impact on sentiment. William Glass, partner with the Geneva-based hedge funds provider EIM, which manages $6bn (€4.49bn) mainly for institutional investors, said Phoenix’ accountancy irregularities highlighted the importance of being vigilant.

“I am afraid that there may be some psychological impact,” he said, calling for institutional investors to “do their homework.”

He said that deciding on hedge funds investments takes “much and qualified understanding” but it was worth making an effort. “The only way to keep out of trouble is to implement a strict, rigorous selection process performed by staff who know what to do and how to do it,” Glass said.

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